September 24, 2020
In the first part of our 2-part case study blog on International Planning, we introduced you to Mary and James, a UK national couple looking for a wealth investment and succession planning solution fitting with their family international environment. Mary and James retired in France while their two children remained UK domiciled, with the plan of moving back to the UK at a later date.
In Part I of our case study we highlighted the efficiencies offered by a Luxembourg made life assurance solution to Mary and James: the Luxembourg tax neutrality, the multi-currency possibility, the investment flexibility and the portability peace of mind.
In Part II, we focus on the favourable tax framework that the Luxembourg life assurance policies offer to France residents compared to traditional portfolio.
In France, life assurance enjoys a favourable tax framework when compared to traditional portfolios:
o Tax deferral on proceeds within the policy
Income generated by unit-linked life assurance policies are subject to taxation and to the 17,2% social security contributions only upon partial or full surrender of the policy, which makes it possible to benefit from deferred taxation. This allows active management (to a certain extent) of the underlying portfolio at a lower cost.
=> In practice for Mary and James:
With their investment made after 27 September 2017[1], in case of a partial or total surrender, Mary and James would in principle be liable to a flat tax of 30% (12,8% income tax and 17,2% social security contributions)[2] on the gain. However, the policyholder may also choose to tax his movable income more globally according to the progressive income tax scale.
It’s noteworthy that life assurance policies in France are not subject to premium tax and do not fall within the scope of the exit tax in the case of relocation.
o Favourable inheritance tax treatment
From a French tax perspective, in the case of death of the life assured, spouses and partners under the PACS agreement are fully exempt from inheritance tax.
For other beneficiaries designated through a beneficiary clause, the below applies:
– For premiums paid before the 70th birthday of the life assured, all other beneficiaries(*) benefit from an allowance of EUR 152,500 per beneficiary. Above this amount, death benefits are taxed as follow:
• 20% on the portion of death benefit below or equal to EUR 700.000
and
• 31,25% on the portion above.
– For premiums paid after the 70th birthday of the life assured, the allowance is EUR 30.500 per life assured. Premiums exceeding this allowance are then subject to standard inheritance tax. Thus, the same allowances and sliding scales apply as for traditional asset portfolios depending on the family relationship.
The 17,2% charge for social security contributions also apply on the gains.
=> In practice for Mary and James:
In case James dies while being French tax resident, French tax will be applicable.
Even if the children are UK tax residents at the time of the death, their father being French tax resident, the French tax will be applicable.
– Mary will be exempt from any tax payment.
– Harry and Sally will each benefit from the EUR 152.500 allowance. Any amount exceeding this allowance is then subject to taxation at a rate of 20% (up to EUR 700,000) and 31,25% (above EUR 700.000)
In addition, Mary, Harry and Sally will be liable to pay social security contributions at a rate of 17,2% on the gains.
All goals have been achieved for James and Mary, now and for the future! With a Luxembourg life assurance solution, they have an immediate tax efficient investment and succession planning tool while living in France, and peace of mind with the continuity of their investment and succession strategy when relocating back to the UK.
“These illustrations are merely an overview of some of the implications of cross-border inheritance/wealth planning therefore practical impact should be assessed on a case-by-case basis with your adviser”
You may also be interested in:
No borders for Luxembourg life assurance! – Part I
Portable life assurance – be as mobile as you like!
Luxembourg: a respected, compliant and secure financial centre
[1] For policies taken out after 1 January 1990.
[2] Please note that income from life assurance policies over 8 years benefit from a reduced tax rate of 7.5% (global tax rate of 24.7%) for the amount of premium not exceeding EUR150,000. A specific allowance of EUR 4,600 (or EUR 9,200 for married couples subject to joint taxation) is also available per year.
(*) policies taken out as and from 20 November 1991 and premiums paid as and from 13 October 1998.